Sterling tumbled against the euro as the single currency has emerged as the markets’ safe haven of choice when faced with a potential war across the Pacific.
A pound now buys €1.0763, down 0.31pc today. At some points it fell below €1.075, matching intra-day lows last seen in October 2009 and approaching the all-time lows experienced at the height of the financial crisis in late 2008 and early 2009.
The euro was already performing strongly this summer as economic growth picks up in France, Germany and their neighbours, while economists expect the European Central Bank to lay out plans for rolling back quantitative easing which will also support the currency.
“The location of the [potential North Korean] conflict and the parties involved make the euro, rather than the US dollar, the preferred safe haven currency of choice,” said FX analyst Jane Foley at Rabobank.
“The result is further strengthening of the euro exchange rate this morning, with the euro breaking 40 pips through the big $1.20 threshold. Robust economic data from France this morning provided further platform for the liftoff of the euro.”
At the same time the dollar has weakened as Donald Trump’s economic promises have not yet come to fruition, unwinding the US currency’s strength from earlier this year.
As a result sterling has fallen by 8.3pc against the euro since the start of 2017 but has increased by 5.3pc against the dollar over the same period.
Meanwhile the UK economy has become more sluggish and traders appear to be awaiting for signs of material progress in the Brexit talks before upgrading the pound against the euro.
Analysts believe the pound could face a little more short-term pressure before gradually rising again.
“We would need to see an additional layer of bad news to fuel any further politically-induced sterling selling. This seems unlikely in the absence of a Brexit disaster situation unfolding – that is a complete breakdown in UK-EU negotiations and renewed cliff-edge risks. Political will from both sides suggests the worst-case scenario will be avoided,” said Viraj Patel at ING.
The weak pound could help exports grow as it makes British goods more competitive internationally, though there are few signs of this boost coming through so far.
“Some analysts argue that a trade boost still will work its way through to the economy eventually, because exporters will use their healthy profits either to invest more or to dispense to shareholders, who then will spend the money. But so far, exporters have decided to hoard cash,” said Samuel Tombs at Pantheon Macroeconomics.
“They have not converted foreign cash into sterling, suggesting they are more inclined to invest in new operations overseas than to expand production in Britain. Investing overseas instead of at home would be the smart choice for UK firms seeking to hedge hard Brexit risk.”